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MPIfG Discussion Paper
MPIfG Discussion Paper 24/7
Mind the Output Gap
The New Technocratic Politics of EU Fiscal Rules in Italy
Camilla Locatelli
Camilla Locatelli
Mind the Output Gap: The New Technocratic Politics of EU Fiscal Rules in Italy
MPIfG Discussion Paper 24/7
Max-Planck-Institut für Gesellschaftsforschung, Köln
Max Planck Institute for the Study of Societies, Cologne
October 2024
MPIfG Discussion Paper
ISSN 0944-2073 (Print)
ISSN 1864-4325 (Internet)
© 2024 by the author(s)
About the author
Camilla Locatelli is a doctoral researcher at the Max Planck Institute for the Study of Societies, Cologne.
Email: camilla.locatelli@mpifg.de
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Locatelli: Mind the Output Gap iii
Abstract
e sovereign debt crisis triggered a process of reforms in European economic governance
that pushed for technocratic handling of budget decisions following standardized proce-
dures, target measures, and indicators for scal monitoring. is shi, aimed at producing
more stability and less conict in budget decision-making, transformed scal policy, pro-
ducing a new type of technocratic scal politics. ese new technocratic instruments impact
on national policymaking, yet little is known about the processes and actors behind their
constitution. Scholarship on the policy response to the euro area crisis has highlighted the
role of national interests but neglected the role of expertise in negotiating highly technical
scal policies. A key measure in this new technical apparatus, the output gap, has been at
the center of a heated contestation between Italian and European institutions over the 2014–
2019 period. Taking the case of the Italian output gap, this paper traces the unfolding of the
dispute around the methodology for estimating potential output and clearly reveals the new
centrality of expertise. e paper argues that rather than producing a less conictual policy
environment and a depoliticizing of scal decisions, technocratic scal politics has reshaped
discussions around budgetary politics. is reshaping extends and transforms actor constel-
lations and venues of scal decisions, giving a larger role to technocratic experts.
Keywords: European Union, scal policy, Italy, output gap, technocracy
Zusammenfassung
Die Staatsschuldenkrise hat einen Reformprozess in der wirtschaspolitischen Steuerung
Europas in Gang gesetzt, der auf eine technokratische Handhabung von Budgetentschei-
dungen nach standardisierten Abläufen, Zielvorgaben und Indikatoren für die Finanzkon-
trolle abzielt. Die Reformen sollten zu mehr Stabilität und weniger Konikten in Budget-
entscheidungsprozessen führen, stattdessen aber entstand eine neue Art technokratischer
Fiskalpolitik. Dieses neue technokratische Instrumentarium hat Auswirkungen auf die na-
tionale Politikgestaltung, wobei wenig über die Prozesse und Akteure bekannt ist, die bei
seiner Entstehung eine Rolle gespielt haben. Die Fachliteratur zur politischen Reaktion auf
die Eurokrise betont die Rolle nationaler Interessen, vernachlässigt aber die Bedeutung von
Expertenwissen bei der Aushandlung hochtechnischer skalpolitischer Maßnahmen. Ein
zentrales Werkzeug dieses Instrumentariums, die Produktionslücke, war zwischen 2014
und 2019 Gegenstand hitziger Debatten zwischen italienischen und europäischen Institu-
tionen. Am Beispiel der italienischen Produktionslücke zeichnet das Papier die Entwick-
lung des Streits um die Methoden der Potenzialschätzung nach und hebt die neue zentrale
Bedeutung von Expertise hervor. Es wird argumentiert, dass die Technokratisierung der
Fiskalpolitik nicht etwa zu einem weniger koniktreichen Politikumfeld und einer Entpoli-
tisierung von Steuerentscheidungen geführt hat, sondern vielmehr zu einer Neugestaltung
haushaltspolitischer Debatten. Diese Neugestaltung verändert und erweitert in der Fol-
ge Akteurskonstellationen und Schauplätze skalpolitischer Entscheidungen und verleiht
technokratischer Expertise eine größere Bedeutung.
Schlagwörter: Europäische Union, Fiskalpolitik, Italien, Produktionslücke, Technokratie
iv MPIfG Discussion Paper 24/7
Contents
1 Introduction 1
2 Doubling down on rules: Technocratic scal politics in the
EMU post-sovereign debt crisis 3
3 Research Approach 6
Italy under European economic governance 6
e output gap and its pitfalls 8
e history and role of the output gap in the European framework 11
4 Minding the gap: Origins and development of output gap contestations
in Italy 14
First phase: Expertise and knowledge communities 14
Second phase: Public politicization and international attention 18
5 Conclusions 21
References 24
Locatelli: Mind the Output Gap 1
I would like to thank Daniel Mügge and Leon Wansleben for being my supervisors on this project.
For helpful comments, I am also indebted to my current supervisor Martin Höpner, as well as Mat-
thias iemann, Vanessa Endrejat, Iacopo Mugnai, Anna Hehenberger, Giovanni Pasinetti, and Edin
Ibrocevic. I am particularly grateful to all my interview partners without which this project would
have not been possible.
Mind the Output Gap: The New Technocratic Politics
of EU Fiscal Rules in Italy
1 Introduction
At the beginning of the summer of 2019, Italy’s destiny within the euro appeared to be at
best uncertain. Failing to meet the European debt reduction targets, the Italian govern-
ment had to authorize a conditional budget freeze as the risk of incurring an Excessive
Decit Procedure (EDP) appeared more real than ever. Italy had, just a few months
prior, risked running into sanctions due to its inability to meet the Stability and Growth
Pact (SGP) parameters. In contrast to earlier conicts about Italy’s public nances, this
time many voices argued that the reasons for this lack of compliance had little to do
with Italian scal proigacy, but rather with a miscalculation on the side of the Euro-
pean Commission. Discussions related to calculating the output gap, a central indicator
in the new architecture of scal surveillance put in place aer the sovereign debt crisis,
spread across academic papers, blog entries, and newspaper articles (Brooks and Basile
2019b; 2019c; 2019a; Tooze 2019).
e output gap signicantly entered the European scal framework thanks to the tran-
sition towards the use of structural budgets for scal monitoring. ese developments
were part of a reform process aimed at moving scal policy decisions towards techno-
cratic management by relying on economic models and standard procedures (Matthijs
and McNamara 2015). As the sovereign debt crisis had brought about constant conict
over scal targets, such a move attempted to routinise budgetary decisions, aiming for
a more transparent and predictable handling of scal policy and a partial depoliticiza-
tion of scal policy. However, the consequences of such an attempt were not necessarily
in line with expectations: as we see in the case of output gaps, moving scal rules to a
completely technocratic realm produced new forms of contestations and political dis-
cussions. In this paper, I investigate how contestation around the use of output gaps in
European scal governance reveals some of the unintended political consequences of
technocratic scal governance.
Despite aiming for less politicized discussions around budgetary politics, technocratic
scal rules generate a new form of politics that connects both to the economic method
behind the numbers used for scal surveillance and the politics around technocratic
scal rules (Cli 2022). e literature on the use of economic indicators in governance
2 MPIfG Discussion Paper 24/7
has already highlighted how moving political decisions outside the realm of politics
through technical devices has controversial eects. e very same indicators upon
which this form of governance is established oer a shaky foundation as their construc-
tion is partial and based on ideological assumptions regarding the reality they are asked
to govern (Mügge 2016; 2020; Aragão and Linsi 2020). Moreover, moving to techno-
cratic governance tends to crowd out discussions regarding the politics behind the use
of such indicators in favor of technical discussion (Tesche 2022). Despite these impor-
tant insights, this literature has le open some questions on how technocratic gover-
nance materializes in practice and what its direct eects are: How does it transform ac-
tor constellations involved in scal governance? How does it reshape existing cleavages?
What kind of new resources become important in handling the new forms of conicts?
I argue that, within this new form of politics where technical discussions supplant po-
litical ones, technocratic actors gain a new role in dening the space where political
discussion can happen. For this reason, actor expertise and their belonging to particu-
lar expert communities is crucial to generate a new interpenetration between political
motives and technical debates. is intersection not only alters existing conicts within
EU scal governance but also extends debates on scal targets beyond the connes of
scal governance.
Investigating how this type of politics unfolds in the context of post-crisis European
scal rules is an important, yet missing, step in understanding the current dynamic of
the euro area economic governance. is paper investigates those unexplored ques-
tions and focuses on the debate around correctly calculating scal targets between Italy
and the European Commission in the period 2014–2019. Using process tracing, I re-
construct and compare two phases of such a debate, highlighting how dierent actor
constellations and political dynamics can generate dierent outcomes under the same
structures of technocratic policymaking. e comparison of the two phases shows the
dierent possible intersections between scal politics and technocratic governance in
the EU system of scal rules.
e paper is structured as follows: e rst section reviews the signicant theoreti-
cal contributions over the post-crisis reforms particularly with respect to the novel in-
struments in scal surveillance. is section also describes the output gap and oers
glimpses into the debate about its functioning. e second section describes the meth-
odological approach and the logic of the case selection. e third section presents the
results from the case study. e nal section concludes by connecting the ndings to
the proposed theoretical framework developed in the rst section.
Locatelli: Mind the Output Gap 3
2 Doubling down on rules: Technocratic fiscal politics in the
EMU post-sovereign debt crisis
EU policy makers responded to the sovereign debt crisis by readapting the institutions
of economic governance that rule budgetary politics in the eurozone, namely the Sta-
bility and Growth Pact (SGP), the regulatory regime that, since the inception of the
monetary union, has aimed to limit scal imbalances by controlling debt and decit lev-
els. Regardless of the dierent interpretations of the crisis’ origins, it is evident that its
unfolding confronted the eurozone with signicant challenges that demanded eective
policy responses. e event triggered a profound transformation of economic gover-
nance in the euro area, powered by the introduction of stronger technocratic manage-
ment heavily relying on rigid rules, deadlines, and economic indicators for monitor-
ing (Schmidt 2020). is paper focuses on the consequences that this move towards
technocratic management produced on the political dynamics between EU institutions
and national member states. However, to understand this current regime architecture
we need to rst review the political and technical struggles at its inception. Many other
policy responses would have been possible, including Eurobonds, EU level wage co-
ordination, the creation of a scal union etc., according to many scholars and practi-
tioners better suited to address the plethora of issues that the sovereign debt crisis had
uncovered (Matthijs and McNamara 2015).
I contend that we can group existing literature on the matter into three interpretation
lines: intergovernmental power-based; supranational; and ideational. I argue here to
not take these as competing explanations but rather useful conceptual lenses to look at
dierent sides of the issue. Following intergovernmentalism, the rules reect the inter-
est clashes within the euro area and represent much more the preferences of northern
European countries for national adjustment mechanism rather than debt mutualiza-
tion (Carstensen and Schmidt 2018; Schimmelfennig 2015). Consequently, this power
imbalance is reected in the diusion of a dominant ideological interpretation of the
crisis: the widespread cognitive understanding of its origins in the scal proigacy of
the south made European leaders interpret the events as a failure of the SGP (Matthijs
and McNamara 2015; Schmidt 2020). rough the lenses of the Brussels–Frankfurt
consensus (Matthijs 2016), the crisis response focused therefore on stricter and more
specic rules that transformed scal policy in an increasingly technocratic way, where
budgetary decisions are insulated from political debates and are driven by the use of
technical models and indicators, such as the output gap (Matthijs and McNamara 2015).
Moreover, such a solution benetted supranational institutions, which could expand
their powers and increase inuence over national budgets. Nevertheless, a full suprana-
tionalization was not possible, as the scal policy issue entailed many veto points (Ver-
dun 2015). e European Commission gained a central role in the implementation of a
mix between so and hard rules giving increasing room for discretion in its operation
(Bauer and Becker 2014; Verdun and Zeitlin 2018).
4 MPIfG Discussion Paper 24/7
However, the materialization of this form of governance and implementation of rules
have entailed close dialogue between national governments and the European Commis-
sion, where technical discussions have not fully overshadowed political decisions. e
focus on the functioning of such a new regime has meant very little attention has been
given to how such technocratic management has developed in practice. Recent contribu-
tions have highlighted how attempts at moving economic governance, and particularly
scal surveillance, to a rule-based technocratic environment generates innovative po-
litical dynamics that intertwine science and policymaking (Cli 2022; Tesche 2022). At-
tempts at depoliticization result in the creation of a new complex form of governance, in
which the governing objects of technocratic policymaking, such as economic indicators,
forecasts and methods, take a central stage in political discussion. is focus on the con-
stitutive elements of technocratic governance reveals the social and political construc-
tion of the technical pillars upon which this governance is constructed. While supporters
of technocratic governance depict moving to rule-based scal policy as a mechanistic
straightforward process, in reality transforming scal policy in a “strict technical” rule-
based system is a rather messy and arbitrary process, riddled with uncertainty.
First, technical models used in technocratic economic governance appear to be less
straightforward than commonly assumed. is exercise of making distributional choic-
es by default relies on the use of macroeconomic indicators such as public decits or
output gaps that are calculated on extremely political formulae, riddled with distribu-
tional implications (Mügge 2016; 2020; Tesche 2019).
Second, rule-based scal governance advocates assume an unrealistic version of scientif-
ic economic knowledge oriented around an apolitical consensus, whereas in reality aca-
demic economics is constantly evolving and fundamental debates around the ideological
foundations of commonly used economic models permeate the discipline (Cli 2022).
Attempts to use complex economic models as value-free tools and as signposts for dis-
tributional decisions for scal policymaking give rise to a plethora of knowledge con-
troversies specically related to the very essence of technocratic rules, i.e., an inter-
penetration between science and politics rather than a replacement of the political by
the technical (Barry 2012). When the policy eld becomes increasingly technical, the
economic models underlying the rules become the battleground for ideational power
quests (Mügge 2016). ose power quests intertwine with existing cleavages of interest,
such as the North–South divide in the EMU, generating a complex mix of political and
technical motives in the functioning of modern governance (Barry 2012).
Finally, the necessity to address these new conicts reshapes actor constellations in-
volved in scal policymaking and the negotiations between the EU and national lev-
els, increasing the importance of technocratic actors on both sides. e move towards
technocratic scal rules empowers governmental epistemic communities (Dunlop 2010),
Locatelli: Mind the Output Gap 5
such as nance ministry bureaucrats, but also technocrats working at DG ECFIN,1
granting them a new role in setting what kind of discussions should take place in the s-
cal policy arena (Matthijs and Blyth 2017). ose actors, thanks to their expertise, gain
power in reshaping what is deemed as “legitimate” discussion in the scal policy eld
and ability to use what Blyth and Matthijs (2017) (referring to omas Kuhn [1996])
call “paradigmatic incommensurability,” as a political instrument to defy other actors’
policy proposals when these do not t in with the prevailing paradigm. Moreover, the
increasing importance of technocratic actors has generated new questions for the politi-
cal side on how to interact with this new empowered group: the relationship between
political and technocratic actors has become a fundamental element in understanding
how this new techno-political type of politics is shaped and develops.
ese fundamental new dynamics have so far been neglected by the existing scholar-
ship on the post-crisis response. Nevertheless, since the crisis and the reforms, European
politics has become more controversial, domestically salient, and politicized than ever
before (Schimmelfennig 2014). I therefore argue that this attempt of routinizing fun-
damental decisions in economic governance has not necessarily provided a more stable
functioning of this policy realm or taken away the arbitrariness from the situation; rather,
through unintended eects, it has reshaped the politics around scal policymaking.
e dynamics of the debate on using output gaps showcase some of these new political
dynamics. e centrality of the output gap, used for assessing the budgetary structural
position of countries’ scal plans, is a feature of the post-crisis economic governance
framework and its role has sparked a heated debate that has involved academics, Eu-
ropean and national leaders (Brooks and Basile 2019a; 2019b; 2019c; Costantini 2018;
Tooze 2019). e centrality of this indicator in the European system of scal rules has
produced important and unforeseen consequences: its dicult estimation, its pro-cy-
clical trends, and its use in the pervasive scal surveillance by the European Commis-
sion have restricted space for scal intervention in response to the sovereign debt crisis,
especially in southern Europe. It is therefore critical to understand the dynamics of its
contestation and its operation within the system of EU technocratic scal rules.
is paper investigates the politics around the output gap contestation by addressing the
following research questions: Did the move towards technocratic scal rules succeeded
in depoliticizing scal policymaking in the EMU? If not, what kind of new political
dynamics did it generate? How does this new interpenetration between the technical
and the political reshape actor constellations and resources involved in the discussions
around scal governance?
1 DG ECFIN is the directorate general inside of the European Commission responsible for scal
surveillance. Within DG ECFIN, the Output Gap Working Group is responsible for the techni-
cal discussion of the methodology related to the estimation of output gaps.
6 MPIfG Discussion Paper 24/7
To investigate the question, this paper uses process tracing and reconstructs the develop-
ment of the output gap contestation in Italy. Tracing the origins of the contestation and
the conditions that triggered it and shaped its development, this paper shows the dier-
ent facets of this new form of technocratic scal politics and draws elements of a theo-
retical mechanism about the functioning of technocratic governance in practice. In the
following section, I briey introduce the empirical strategy employed to study the output
gap debate in Italy. Later, I go deeper into the empirical parts explaining the functioning
of the output gap and its role in European scal rules and later its contestation in Italy.
3 Research Approach
e following section analyses the eects of the move towards technocratic scal gover-
nance and traces the contestation over using output gaps in the euro area’s scal gover-
nance by examining the case of Italy and its negotiations with the European Commis-
sion between 2014 and 2019. is study uses theory building process tracing (Beach
and Pedersen 2013) which aims to construct “theories of casual mechanisms that are
applicable beyond the single case” (Beach and Pedersen 2013, 154). is paper starts
with the international contestation around the use of output gaps for scal governance
between the European Commission and Italy. It investigates the necessary and su-
cient causes that led to the appearance of the contestation, its enlargement, and the
involvement of dierent type of actors. I inductively delineate the scope conditions that
allowed the contestation to come about by connecting it both to the historical dynamics
of the Italian political scenario aer the crisis as well as the long chain of consequences
of the changes in European economic governance.
To empirically trace this process, I use dierent data sources, including policy documents
by the Italian government and the European Commission. I complement this analysis
with the use of grey literature. Fieen expert interviews support the documents’ analysis.
e respondents included members and former members of the Italian nance ministry,
the European Commission, the European Fiscal Board, and the Italian Fiscal Council.
For reasons of anonymity, those interviews cannot be quoted directly; it should be kept
in mind that they served mainly as background information for the reconstruction of the
contestation and the analysis of the documents. e following section provides a brief
historical background on the context in which the contestation has developed.
Italy under European economic governance
At the end of the 2010s, aer a long decade of eorts, Italy was still facing hard times
trying to escape the recession trap which began with the onset of the sovereign debt
Locatelli: Mind the Output Gap 7
crisis (Storm 2019). Despite some commonalities with the trajectory of other southern
European economies, the debate on the reasons for Italy’s enduring low growth is still
open (Notermans and Piattoni 2019). Many dierent sets of explanations have been
used to understand the root causes of Italy’s stagnation (for a review see Krahé 2023).
Membership of the euro has strongly aected the Italian political landscape. e com-
mon currency requirements have deeply inuenced public spending decisions since the
early 1990s, triggering a wave of critical structural reforms and austerity measures (Sac-
chi 2018; Storm 2019). In spite of this transition, during the decade following the sover-
eign debt crisis, Italian growth remained lower than other euro area countries, even the
peripheral ones (Storm 2019). As the sovereign debt crisis unfolded, Italy became one of
the biggest threats to eurozone stability. Despite two full decades of public austerity, Italy
had and still has one of the highest levels of public indebtedness of the entire euro area
(with an even stronger increase with the Covid-19 pandemic). Being one of the largest
economies of the euro area, oen considered “too big to fail,” as well as one of the found-
ing members of the European Community, the destiny of Italian public nances always
seems to strongly intertwine with that of the common currency (Badell et al. 2019).
Due to Italy’s lasting and severe economic condition, its situation under the post-crisis
scal framework was at the very best ambiguous (Moschella 2017). Aer public aus-
terity failed at providing fuel for new growth but depressed internal demand, more
austerity and structural reforms were to come (Storm 2019). However, due to the need
to show strong commitment to the European project, Italy stood by the rules (Badell et
al. 2019; Moschella 2017; Krahé 2023; Sacchi 2015). Moreover, it is essential to keep in
mind that many Italian economists at the time were the primary advocates for the “ex-
pansionary scal consolidation” logic that lay at the heart of the post-crisis framework
(Dellepiane-Avellaneda 2015; Helgadóttir 2016; Storm 2019).
Aer the crisis, Italian underperformance generated multiple lines of tension between
the Italian government and European institutions, where Italy consistently demand-
ed more exibility and emphasized the need to restore growth-boosting mechanisms
(Carstensen and Schmidt 2018). ose frictions oen managed to capture international
attention due to the crucial role that Italy plays in the eurozone dynamics. Moreover,
Italy has an important legacy of technocratic ruling, dating back to the ’90s, particularly
connected to membership in the common currency. e logic of vincolo esterno, i.e., the
presence of an external pressure that would isolate scal decisions from seeking short
term electoral gains, has for long ruled the decisions in monetary and scal policy that
brought Italy in the common market (Jones 2017; Radaelli 1998; Baccaro and D’Antoni
2022). Understanding how the Italian political landscape moved from a widespread
consensus on the benet of technocratic handling of European matters to a heated and
lasting contestation allows this study to showcase some of the specic political dynam-
ics generated by technocratic scal rules.
8 MPIfG Discussion Paper 24/7
Studying this contestation oers a new angle to the analysis of the post-crisis scenario in
Italy, one that goes beyond the description of structural dynamics but looks at the eect
that a specic idea of handling scal policy through strict and technical rules has gener-
ated. Moreover, the output gap itself represents a crucial element in the renewed Euro-
pean scal framework, since it provides a foundation to the whole new architecture of
scal monitoring (Heimberger, Huber, and Kapeller 2019). Having been the center of
widespread criticism and discussion, the output gap reveals the complexity of making a
very political side of policymaking technical.
The output gap and its pitfalls
is section summarizes the major fault issues of the output gap model, highlighting
related aspects of instability and latent contestability. Understanding this indicator’s
complexity is a fundamental step to shed light on the political dynamics that develop
through its use. e following explanation of the output gap complexity claries the
contestability potential inherent in its usage in politics. Moreover, this explanation pro-
vides an insight into the technical debate on the matter within the expert community.
e output gap is a tool used to assess the scal space of a country, and it is pivotal to
the estimation of structural balance (SB). e SB captures a country’s public spending at
some dened level of output or policy target, which is considered to remain unaected
by uctuations of the business cycle (Costantini 2015). In a nutshell, it estimates the dif-
ference between government revenues and expenditures net of good or bad economic
cycles. is assessment oers a snapshot of the underlying condition of an economy,
separating its structural position from the cyclical one. It is used, therefore, to calculate
the structural budget, i.e., an estimate of the structural economic conditions of a coun-
try, a fundamental cornerstone of the post-crisis EU system of rules. In distinguishing
between cyclical and structural conditions, the output gap estimates the relative posi-
tion of a country to its potential (the above-mentioned dened level of output). e out-
put gap, indeed, is basically dened as the dierence between the actual output (current
output that reects the business cycle) that a country has in a specic year and its po-
tential output, namely the output that its economy would have if it would be running at
maximum potential (thus a measure that should represent the structural performance
of the economy).2 Potential output is dened as “the level of output that can be produced
with a ‘normal level’ of eciency of factor inputs”3 (Havik et al. 2014, 11), namely by ex-
ploiting all factors at non-inationary levels.
2 Potential output represents the output that can be produced if the economy were operating at
maximum sustainable employment, where unemployment is at its natural rate. is means the
maximum level of output that can be produced without inationary pressures. When output is
above potential, it means that growth is causing inationary pressures (Okun).
3 Quotation marks in original text.
Locatelli: Mind the Output Gap 9
In the context of countercyclical scal policy, a positive output gap would signal that
the economy is overheating, because it is running over its potential, and therefore gen-
erates inationary pressures. Similar pressures would steer policy in the direction of
scal consolidation, aimed at enhancing the potential of the national economy (and
thus closing the gap). Conversely, a negative output gap would signal that an economy
is underutilizing its resources. Such a trend would push policy towards scal expansion,
as it would signal slack in the economy and, simultaneously, space for a demand-driven
stimulus. In turn, this indicator signals when growth is on an undesirable path regard-
ing ination dynamics.
Estimating potential output is a complex and controversial procedure. e disputes over
the correct methodology are vast and they revolve around three fault lines: (1) the esti-
mation method problem; (2) the statistical ltering problem; and (3) the pro-cyclicality
& pessimism issue. Concerning (1), discussions on the theoretical approach of potential
output estimation focus on distinguishing approaches based on purely statistical esti-
mations or a production function (Costantini 2015). Statistical approaches rely on de-
ducing current growth dynamics purely from past growth dynamics. Production-func-
tion approaches represent an exercise in economic theory that is based on assumptions
about the evolution over time of the growth components of an economy (assuming that
growth of potential output is only a supply-side phenomenon). e choice among these
two models has signicant consequences on the components of the calculations and the
theoretical assumptions behind the estimation procedure.
e purely statistical approaches rely on applying a statistical lter4 to time series data
on the evolution of real GDP. e lter allows separating cyclical uctuations from
structural ones by smoothing the impact of cycles over the trend GDP growth (Hodrick
and Prescott 1997). In turn, this results in estimating potential output as trend output
(Fontanari, Palumbo, and Salvatori 2019; Palumbo 2015).
ese purely statistical approaches5 tend to have two signicant drawbacks: on the one
hand, because the trend is stochastic,6 the decomposition of the series between trend,
cyclical, and accidental tends to be arbitrary, and the result changes by using dierent
lters; on the other hand, positive and negative output gaps estimated in a purely statis-
tical way tend to be uncorrelated with ination trends (Fontanari, Palumbo, and Salva-
tori 2019).7 ose shortcomings have made the output gap inherently unreliable, which
4 In the case of the EC, a Hodrick-Prescott lter.
5 Statistical approaches tend to be dened as “theory-free,” but they do actually rely on strong the-
oretical assumptions, such as the one that assumes that actual output tends to uctuate around
potential output (Fontanari et al. 2019).
6 Stochastic means that the trend has a random probability distribution that can be analyzed
statistically but not exactly predicted.
7 is implies that the actual phenomenon that this indicator aims to measure, i.e., the path that
growth is taking concerning ination dynamics, might be misrepresented by this type of esti-
mation.
10 MPIfG Discussion Paper 24/7
has led international organizations such as the OECD and the IMF, and the European
Commission, to progressively abandon this set of approaches (Morrow et al. 2015).
e production function (PF) approaches, also oen called “economic methods,” es-
timate potential output through a series of assumptions about the potential supply of
an economy (Morrow et al. 2015). is class of estimation approaches is considered to
better link potential output estimates to economic theory. However, it shows the critical
drawback of requiring many presuppositions on an economy’s productivity, estimated
by a combination of factor inputs multiplied by total factor productivity (TFP). ese
assumptions relate particularly to the concept of the natural rate of unemployment
(NAIRU)8 and the dierence in methods used to estimate it (Fontanari, Palumbo, and
Salvatori 2019; Heimberger and Kapeller 2017; Palumbo 2015). e Non-Accelerating
Ination Rate of Unemployment (NAIRU) is the theoretical level of unemployment at
which ination is believed to remain stable. While its very existence in empirical terms
is debated, it nevertheless remains a target in policymaking (Yglesias 2014).9 NAIRU
estimates are included in the production function because they oer a basis for estimat-
ing labor inputs, calculated as the total working hours oered by the active labor force
(Heimberger and Kapeller 2017).
Concerning (2), the critical analysis of the dierent estimation techniques for the fac-
tors involved in the PF approach, especially the NAIRU estimates, has stimulated an-
other debate. Criticism oen relates to the volatility of forecasts in real time: in such
approaches, the NAIRU is oen computed as the “trend component” of the actual un-
employment rate, removed from cyclical factors. Most approaches rely again on the use
of statistical lters (in the EC case, Kalman lter) to estimate this trend, which updates
forecasts as soon as new information is available, giving an oversized role to the most
recent data. is feature of statistical ltering, eventually, shows the tendency to pro-
duce pro-cyclical estimates that make uctuations in the natural unemployment rate
follow the current one, “naturalizing” unemployment at any given moment.10
Moreover, this process basically ends up estimating potential output again as a form of
trend output, just in a more complex and indirect way11 (Fontanari, Palumbo, and Sal-
vatori 2019). is critical relevance of new information inherent in the use of statistical
lters also creates continuous changes in past estimates and reassessments of the trends.
Such constant corrections invalidate the reliability of policy prescriptions based on past
estimates (Fontanari, Palumbo, and Salvatori 2019; Heimberger and Kapeller 2017).
8 Non-Accelerating Ination Rate of Unemployment.
9 For reasons of space, I cannot go into detail on the debate over NAIRU and the natural rate
hypothesis.
10 Applying these concepts results in the denition of some level of unemployment (the natural
level) as natural, inherent, or normal to the system.
11 Also relying on the unproven assumption that potential evolution closely follows the actual
evolution.
Locatelli: Mind the Output Gap 11
Concerning (3), in the European context, the global nancial crisis was followed by
a general drop in potential output estimates for the entire eurozone (but mainly for
southern European countries), resulting from changes in the NAIRU estimates. e
estimates’ adjustment has generated a strong pro-cyclicality in potential output fore-
casts. As actual output worsened and unemployment rose, the technical features of the
statistical ltering created similar trends for potential output and the natural rate of
unemployment, eectively closing the output gap for many countries (Arbogast, Van
Doorslaer, and Vermeiren 2023). In turn, this meant that despite rising unemployment
aer the crisis, those countries did not benet from an opening up of the output gap,
which would have granted space for public spending.
As the output gap plays a central role in the eurozone scal framework, being used
to measure countries’ scal eorts under the surveillance of the European Commis-
sion, its inherent pro-cyclicality has had signicant consequences for specic countries
– southern European in particular – steering policy in the direction of structural re-
forms rather than scal stimulus (Heimberger and Kapeller 2017). As a consequence
of these technical issues, many critics pointed to problems using output gaps as central
indicators for scal monitoring. Basing policy advice on such a shaky estimate seems
to produce more harm than good (Heimberger and Kapeller 2017; Heimberger, Huber,
and Kapeller 2019; Brooks and Basile 2019a; 2019b; 2019c; Tooze 2019; Sumner 2020).
e problems inherent in estimating output gaps have contributed to its transformation
into a controversial element of the post-crisis European framework. In order to under-
stand the development of the Italian contestation, it is crucial to grasp the technical
uncertainty around both this indicator and the approach chosen by the European Com-
mission to estimate it. Such uncertainties enabled technocrats at national and European
levels to leverage existing technical debates in political negotiations about scal targets.
In what follows, I present the methodological approach chosen by the Commission.
The history and role of the output gap in the European framework
Calculating output gaps, inherent in the estimation of the structural balance (SB), i.e.,
an estimate of the actual decit of a country that is neither dependent on structural con-
ditions nor one-o exceptional measures (negotiated politically), signicantly entered
the EU scal framework with the rst reform of the Stability and Growth Pact in 2005.
is revision of the Pact, a consequence of the violations of the nominal ceilings for
debt and decit by many countries (in particular, France and Germany), was directed
at better accounting for the impact of cyclical conditions on revenues and expenditure
and the way they inuence budgetary decisions (Costantini 2015). Such an orientation
implied focusing the assessment on scal eorts rather than outcomes, and introduc-
ing measures that would better allow separating cyclical conditions from the structural
setting of an economy. Against this background, the structural balance was given new
centrality in the EU framework. As a matter of fact, despite being previously already
12 MPIfG Discussion Paper 24/7
available and in use, the SB presence was limited to an informal role, i.e., as a working
instrument (Larch and Turrini 2010).
Consequently, its relevance was strengthened during the post-eurozone crisis reform
process. With the adoption of the Fiscal Compact in 2013, the SB became central in the
eurozone architecture of scal rules (Heimberger and Kapeller 2017).
e structural balance is used in the evaluation of scal policies regarding deviations
from the Medium-Term Objectives (MTOs). Under the preventive arm of the Stability
and Growth Pact, MTOs were put in place to ensure sound scal health: due to an eval-
uation of a country’s economic situation and sustainability conditions, they set targets
for structural budget adjustments (at a rate of 0.5% of GDP as a benchmark) (European
Commission 2019). All countries are required to make more adjustments when the
economic situation is favorable, and less in hard times. However, countries with high
debt burdens (like Italy) are asked to make faster progress towards their objective (i.e.,
more adjustment).
Against this background, the output gap model has been used as the monitor mecha-
nism in estimating the structural balance. As the stance of scal policy is counter-cy-
clical, positive output gaps signal the existence of space for scal expansion; negative
output gaps signal the need for consolidation.
In the European context, the methodology for estimating output gap is decided within
the Output Gap Working Group (OGWG), a permanent working group of DG ECFIN,
where delegates – technocrats – from each country’s nance ministry discuss technical
aspects of the model and reach the so-called “commonly agreed methodology.” is
methodological agreement represents a set of rules and parameters that should be able
to accommodate all countries’ needs and specic economic structures in the making
of this indicator (Heimberger et al. 2019). e group has existed since the early 2000s
and has focused on improving the calculation of this indicator, even before it became
central for scal monitoring. e actual methodology chosen by the Commission has
its origin in the approach used by the OSCE, one of the international organizations at
the forefront in developing the output gap methodology.
Despite initial enchantment with the advantages that such an estimate would oer, the
shortcomings of the SB on estimating the underlying scal position and the structural
adjustment emerged quite early in its adoption (Larch and Turrini 2010). e conceptu-
al beauty of this indicator – namely its simplicity and intelligibility by political leaders12
– conceals a plethora of practical issues (Larch and Turrini 2010). As mentioned above,
the tendency to pro-cyclicality and the uncertainty of output gap estimates among oth-
12 At least in its simple and direct mechanism that automatically determines the scal stance in
connection with the dierence between actual output and potential. However, its technical
makeup is far from being easily intelligible, as shown above.
Locatelli: Mind the Output Gap 13
ers have a material impact on its actual functioning as a tool for policy monitoring and
thus national policymaking.
Aer having given up a statistical approach in 2002, the Commission methodology to-
day relies on a Cobb Douglas production function (Costantini 2017). is approach has
received much criticism in recent years due to a set of issues connected to the estima-
tion of the structural unemployment and Total Factor Productivity (TFT), i.e., a mea-
sure of technological progress. e criticism relates to the aforementioned estimation
method problem (1) and the statistical ltering (2), as it relates to both the methodology
for the estimation of the single components and the overall specication of the produc-
tion function.
Concerning structural unemployment, the Commission uses the trend component of
the NAWRU,13 calculated with a Kalman statistical lter, as a proxy. As discussed pre-
viously, the use of Kalman ltering tends to oen produce very pro-cyclical measures,
due to the recursive nature of such a tool and its tendency to give disproportionate rel-
evance to the newest data (Heimberger and Kapeller 2017). On top of this technical is-
sue, the Commission relates the trend component of the NAWRU to the concept of the
natural rate of unemployment – at which wage ination does not accelerate – taking a
somewhat debatable approach to economic theory. As, according to theory, the natural
rate should only reect labor market rigidities, the actual approach of the Commission,
using the Kalman ltered NAWRU as a proxy, estimates it as a mix of structural and
cyclical factors (Heimberger, Huber, and Kapeller 2019). Moreover, using the NAWRU
as a policy target is in and of itself a disputable exercise that has received many critiques
in recent years: the extreme uncertainty that comes with the estimates (very sensitive to
the forecasts horizon and other technical aspects) as well as the empirical evidence that
shows rather an insensitivity of wage ination to the actual unemployment rate, has
cast serious doubts on the possibility of using such a measure for structural unemploy-
ment (Fioramanti et al. 2020; Stirati 2016). Concerning total factor productivity, the EC
production function uses the famous Solow residual as a proxy for technological prog-
ress, which is known to be a catch-all variable for all factors that contribute to changes
in GDP not related to labor and capital (Heimberger and Kapeller 2017). is variable
is again unobservable, and its capacity to capture the actual dynamics of technological
change is debatable (Reati 2001).
Despite the introduction of many improvements, such as the Plausibility Tool in 2016,
which were supposed to reduce the dimensions of uncertainty connected to the mea-
sure, the European Commission itself acknowledges that the methodology still carries
uncertainty over reference models, processes, and parameter values (Hristov, Raciborski,
13 Non-Accelerating Wage Rate of Unemployment. e Commission uses the NAWRU as the un-
employment rate at which wage ination remains stable, relating it directly to the concept of the
NAIRU, which normally refers to the unemployment rate at which price ination would remain
stable. e two terms are used quite interchangeably by the EC (Heimberger et al., 2017).
14 MPIfG Discussion Paper 24/7
and Vandermeulen 2017). ose aspects of uncertainty have been at the center of meth-
odological discussion over the years within the OGWG and have until recently remained
conned within technical circles. However, when the structural balance (and thus the
output gap) became central in the Commission framework for scal monitoring, the
discussions over the technical details of this model crossed the boundaries of this techni-
cal group and moved to the political and public arena. Particularly in the case of Italy, it
became a matter of continuous discussion for over ve years, involving in dierent ways
new actors and venues. In the following section, I reconstruct the contestation.
4 Minding the gap: Origins and development of output gap contestations
in Italy
First phase: Expertise and knowledge communities
In November 2014, the Italian nance minister Pier Carlo Padoan appeared in an inter-
view with the Financial Times, accusing Brussels of “shaky accounting” (Politi 2014). He
claimed that the Commission apparatus for evaluating scal policies was ill-suited for
the decisions at stake (Politi 2014). Using his expertise as a former chief economist at
the OECD, he laid out a technical critique of the potential output estimates used by the
European Commission, showing how those were miscalculating Italy’s performance.
Such a public statement was issued in a highly tense moment of the budgetary approval
procedure: the government at the time was led by Matteo Renzi, who led a coalition
between the center right Democratic Party (PD) and smaller centrist and center right
forces. Just before, the dra budgetary plan presented by Italy on October 15 (follow-
ing the European Semester calendar) had mentioned critiques to the potential output
measures and oered a divergent estimation of Italian scal space from the European
Commission estimations. is allegation was the rst step of a contestation that lasted
for over ve years, leading to heated debates between Rome and Brussels.
e dispute related to the estimation of the structural adjustment needed for Italy un-
der the new framework: Padoan argued that the Commission methodology miscalcu-
lated the actual position of Italy’s public nances and that, therefore, there was actually
more room for exibility in approaching the MTO than the Commission envisaged.
Despite adopting the same methodology (i.e., the Commonly Agreed Methodology),
Italy presented a dierent estimation of the space for public spending: the Commis-
sion estimates showed a 3.5% of GDP output gap for Italy, which would have required
(following the medium-term objectives) a reduction of the structural budget decit of
0.7%. Italy estimated a slightly dierent value by using another set of parameters and
measures compared to those of the Commission (mainly a dierent timespan on the
statistical lters). However, in the Financial Times interview, Padoan compared the EC
estimate with that of the OECD, which showed an output gap of 5.1%. If the OECD
Locatelli: Mind the Output Gap 15
estimation had been used, Italy would not have had to provide any adjustment for that
current year: the situation would have qualied as negative enough to reduce pressure
for adjustment (Politi 2014). At the core, the Italian ministry argued that the EC meth-
odology underestimated Italy’s potential GDP growth and that the required adjustment
relied on unstable calculations.
is public claim by the Italian nance ministry did not remain isolated. Soon aer, a
group of well-regarded Italian economists wrote an article explaining the theoretical
and empirical aws of the Commission methodology in an Italian newspaper (lavoce.
info) (Cottarelli, Giammusso, and Porello 2014b). at venue became the arena for a
confrontation directly with the Commission: in the next few days, a debate around the
output gap methodology developed between EC economists and the group of Italian
economists (Cottarelli, Giammusso, and Porello 2014a). Not long aer, the Commis-
sion openly addressed the methodological problems with a publication actively defend-
ing its approach as the outcome of negotiations of dierent interests in the framework
of a “commonly agreed methodology” (Havik et al. 2014).
Aer these rst shots were red, the controversy remained silently in the background of
the political debate: every year onwards under the ministry of Padoan, when Italy pre-
sented the dra budgetary plan to the Commission, there would be discrepancies in the
measures and a mention of the methodological issue. Several interviewees argued that
this appeared to be an attempt to make a political point by means of a technical critique.
Usually, during the budgetary procedure, there would be informal contacts between the
ministry and the Commission in the run-up to the budgetary season aimed at obtain-
ing the least dierent measures on public nances indicators, amongst which was the
structural balance (in order to appease the possible conict and increase the credibility
of Italian public nances). When Pier Carlo Padoan came to oce, a clear attempt to
make those measures as divergent as possible was made, aiming to spark a discussion
on the divergent estimates. To be clear, that did not mean tweaking the numbers but
rather showing how changing small aspects of the parameters (such as the timespan
over which the cycle is calculated) would result in a completely dierent assessment of
the adjustment required.
However, despite the issues at stake being quite high, this open-ended debate among
economists did not become the focus of institutional conversations about the budget
and, for the moment, did not further expand into a broader public discussion inside or
outside Italy.
In March 2016, the dispute reached another high point, as Italy led a group of countries
(Lithuania, Slovakia, Luxembourg, Portugal, Spain, Slovenia, Latvia) asking for a revi-
sion in the projection horizon of the output gap forecast exercise. is request resulted
in an exchange of letters with the Commission, authored by the eight nance ministers:
the aim was to achieve a small methodological change, i.e., extending the horizon of
two years to four, despite maintaining the same general approach. e argument put
16 MPIfG Discussion Paper 24/7
forward by this group of countries focused on the increasing uncertainty in output gap
estimates, especially in times of crisis, and the inconsistencies between the approach
used by member states and the Commission’s approach.
Fixing the temporal horizon issue would have realigned most countries’ estimates to
the Commission’s, generating a more transparent and accurate framework for evaluat-
ing structural eorts. Moreover, the letter suggested the need to complement the use of
the output gap with other indicators, considering the unreliability of its estimation in
real-time (Country Members 2016). e Commission accepted the criticism and later
changed the forecast horizon with an extension.
is change by the EC brought a moment of closure to the issue, without, however, com-
pletely satisfying Italy’s – and other countries’ – demands. e change of the horizon
would partially improve the situation of Italy but would not solve the problem of rely-
ing on only one shaky indicator for estimating the scal space. Later in October 2016,
the Commission introduced the so-called Plausibility Tool as a part of a constrained
discretion approach to the Production Function methodology (Hristov, Raciborski, and
Vandermeulen 2017). Acknowledging the uncertainties that come with estimating out-
put gaps in real-time and the inaccuracies of the EC methodology, the Commission in-
troduced this instrument for ex-post checking the reliability of the output gap’s estimate
with a range of values. If the estimated output gap fell outside that range it is considered
“potentially counter-intuitive,” and its estimation might need to be revised (Hristov, Raci-
borski, and Vandermeulen 2017).
Despite these changes, subsequent budget approval cycles were repeatedly accompa-
nied with criticism of the methodology in the discussions between the Italian nance
ministry and the European Commission (Ministero dell’Economia e delle Finanze
2016; 2017; Padoan 2016). It became particularly important in 2017, when Italy risked
an EDP (Excessive Decit Procedure), as its expenditure plans seemed to deviate too
far from reaching the medium-term objectives xed for the country. Italy mentioned
the methodological problem again when asking for more exibility (Padoan 2017). is
time, however, as the issue had recently reached a partial closure, the Commission was
not particularly willing to listen to this further technical criticism. Up until this point,
despite the EC having recognized the legitimacy of the points raised by the Italian gov-
ernment, the issue never expanded into a larger institutional discussion. Within the Eu-
ropean bureaucracy, the dispute remained pretty invisible and did not trigger any major
renegotiation of the complete architecture of scal rules. Nevertheless, Italy received no
sanction as it was eventually considered to be broadly compliant with the rules.
In 2018, Italy held elections that resulted in the creation of an anti-establishment govern-
ment, formed by a coalition of the right-wing Lega Nord and the anti-system Movimento
Cinque Stelle. is change in government also marked a turning point in the process.
Locatelli: Mind the Output Gap 17
e change in government sealed the end of the rst phase of this contestation in which
the role and expertise of the nance minister determined the development of the dis-
pute. In fact, in the rst instances, the contestation remained mostly conned within the
institutional dialogue between Rome and Brussels and attracted mainly the attention of
local expert communities. ese rst stages entailed a thorough technical contestation
that required its perpetrators to be informed and competent on the methodological
elements of the output gap calculation. Despite seeming trivial, it is essential to keep
in mind that the extreme complexity of the technical make-up of the model isolates a
rather small group of people competent enough to understand and criticize its techni-
cal aspects. Even within the Commission or the Italian nance ministry, as conrmed
during the interviews, only the few directly involved in its construction would be able
to understand and fully debate all aspects of the methodology.
is phase shows that, under Padoan’s nance ministry, there came a realization that the
new framework was built on an unstable ground, despite its aim to ensure transparency
and non-arbitrary management of scal policy. is unstable ground could be shaken
whenever it was useful for political gain. As in 2014, a discourse of exibility in the rules
again came on the agenda of European leaders, thanks to the eorts of the Italian and
French government, and an opportunity window to steer the scal stance partially away
from austerity seemed to open up (Carstensen and Schmidt 2018).
In this context, the expertise and international credibility of the nance minister him-
self could be used as a weapon to gain legitimacy in criticizing the EC approach, and
obtain further exibility: Padoan, thanks to his expertise, was recognized as a good
spokesperson for such critical remarks and was thus listened to and taken seriously.
Such legitimacy did not come only from his ability to present a sharp critique, but also
from his belonging to the same experts’ community – of mainstream economists work-
ing in international institutions – of the Commissioners working on the methodology
in Brussels. Moreover, Padoan’s position as a member of both worlds, the technocratic
one and the political, gave him the ability to navigate the complexity of the interpen-
etration between the technical and the political of the post-crisis scal policy eld.
Consequently, the Commission, particularly DG ECFIN, became the site of an ideational
discussion over the technical aspects of a model that in reality disguised a conversation
over dierent understandings of the necessary path that scal policy should have fol-
lowed to counter the crisis. ese dierent understandings were related mainly with the
objectives and focus of scal policy (within the same broad paradigm) rather than with
the benets of the technocratic handling of this policy realm. e output gap critiques
in this phase did not aim to get rid of this system of technical rules and models, but
rather to show that the very same rules could be interpreted in a very dierent way by
comparatively skilled local technocrats belonging to the same experts’ community. As
mentioned before, Italian economists – including the ones that agreed on the critique
oered by Padoan – were also supportive of the EC logic that pervaded the rules, and
they maintained consensus on the general apparatus. e dispute they engaged in clearly
18 MPIfG Discussion Paper 24/7
resembled a scientic debate, where the aim was to highlight the technical inconsisten-
cies in the functioning of the rules and claim power through applying expertise on how
the estimates should have been used. As the eld of scal policy had been more techni-
cal, the only legitimate critique would be of a technical kind, and the only legitimate
perpetrators would be actors recognized as valid members of the European scal policy
community. e dispute about the output gap did not, however, disappear aer these
rst instances.
Second phase: Public politicization and international attention
e second phase of this contestation took place in a dierent context, in which Italy
was under the rule of populist, anti-establishment, and eurosceptic government. In the
following analysis, I show that the attitude of the government towards European institu-
tions and scal rules is a crucial element in explaining how the contestation developed
in this phase, because it enabled interpenetration between technical and political mo-
tives in the output gap discussion and helped to expand it beyond the limits of Europe-
an economic governance. e fact that a eurosceptic government leveraged a technical
dispute for clear political purposes without specic engagement with the elements of
the original controversy shows how deeply technocratic scal governance has trans-
formed the lexicon and the actors connected to scal governance.
Already at the beginning of its mandate in 2018, the government attempted to overturn
the Italian scal stance, reversing some of the structural changes that the Italian welfare
state had undergone in the previous years. e government scal plan revolved on the
introduction of an income support scheme (Reddito di cittadinanza), in line with the
Commission recommendations on the European Social Pillar, and a pension reform
(Quota 100), partially lowering the retirement age for specic categories of workers.
From the rst months, relations between Italy and European institutions became par-
ticularly heated, as the leader of the Lega Nord, one of the two vice-prime ministers of
the government, openly showed his willingness to engage in a political ght over the
rules for scal spending.
At the time of the rst budgetary cycle, the discussion over scal objectives translated
into a political ght. In October 2018, one week before presentation of the dra bud-
getary plan, the recently created Italian Fiscal Council14 did not validate the macroeco-
nomic planning of the government, warning about the absence of complete coverage
for the planned expenses and, thus, the risk of exceeding the decit ceiling set by the
European rules. A few weeks later, the Italian dra budgetary plan was rejected for the
14 e Parliamentary Budget Oce (Ucio Parlamentare di Bilancio – UPB) was created in com-
pliance with the Two-Pack rules in 2014. is moment is the rst time in which it actively par-
ticipated in the debate over budget decisions.
Locatelli: Mind the Output Gap 19
rst time ever by the Commission due to its risk of non-compliance with the MTOs
envisaged for Italy. e budget included a decit forecast of 2.4%, much higher than
the one required to comply with the target set for Italy under the preventive arm of the
SGP. If such a deviation would have remained, an Excessive Decit Procedure (EDP)
could have been opened against Italy, which would have resulted in possible sanctions,
making Italy’s position in the surveillance process even more complicated (and likely
impacting on Italy’s ability to nance itself on sovereign debt markets).
A reference to the divergent estimates of the output gaps was included in the budgetary
plan, as a partial justication for breaching the set limits (Ministero dell’Economia e
delle Finanze 2018). e refusal of the planned expenditure triggered an exchange of
letters between the nance ministry and the European Commission: the Italian govern-
ment justied the increase in spending as a necessary step for bolstering growth and
considered the deviation from the set targets only temporary and necessary to give
some breadth to the Italian economy (Tria 2018).
ese letters did not, however, further engage in a critique of the Commission estimates
as a way to justify the deviation from the parameters. e response from the Commis-
sion denied further exibility for Italy, highlighting that Italy had committed to the
targets a few months earlier (when the previous government was still in charge), and
that Italy had benetted many times from further exibility in the rules. Eventually, the
nance ministry had to come up with a corrected budgetary plan, which tried to nd a
compromise in the decit forecast, despite maintaining the two main policy targets of
the new government in place: the so-called citizens’ income, a comprehensive system of
unconditional income support, and a “at tax” for small business and the self-employed.
Eventually, the EC approved Italy’s plan, without however being able to pull the plug on
this strand of contestation.
Soon aer the output gap issue revived and reappeared. As Italy was about to face the
risk of an EDP, the contestation moved to another arena: the leader of the Lega Nord
and also vice-prime minister in oce, Matteo Salvini warned multiple times in the
press that European scal rules needed to be changed, as the current status was limiting
Italy’s performance (Rossi and Jones 2019).
As the Commission warned Italy of its deviation from the debt rule and the risk of in-
curring an EDP, Italy’s response pointed to the dierent economic situations depicted
by Brussels’s measures and theirs (Moscovici and Dombrovskis 2019; Tria 2019). In
contrast to previous heated moments in the dispute, this specic moment captured the
attention not only of the Italian media and Italian economists, but also the scholarly
community outside Italy, which, surprisingly, seemed to stand by the point being made
by an anti-establishment eurosceptic government (Giles and Johnson 2019).
Aerwards, developments in the contestations clearly exceeded the boundaries of Italy’s
scal policy decisions. e vicissitudes of Italy became the central point of a plethora
20 MPIfG Discussion Paper 24/7
of articles, working papers, and twitter campaigns aimed at spreading awareness and
critical remarks on non-measurable indicators used in evaluating scal plans by the Eu-
ropean Commission (Brooks and Basile 2019b; Costantini 2018; Tooze 2019). is ex-
posure drew even more international attention to the vicissitudes of Italian scal policy
decisions, which soon aer reached the highest point of tension in this overall debate.
At this juncture, there seemed to be general agreement in the scholarly economist com-
munity on the diculty of relying on estimates of the output gap in real time for scal
monitoring because it requires including a high degree of uncertainty in fundamen-
tal policy prescriptions. e criticism aligned economists of usually dierent positions,
from heterodox to the le of the mainstream. e technical debate on the output gap
became a site for ideological discussion amongst economists from dierent camps not
only on the uncertainty of the output gap technical estimate, but also on the ideological
assumptions regarding the impact of scal policy on growth. e technical indicator
became, therefore, the battleground for both an academic and a political discussion.
Eventually, the warning of the Commission was formalized into a document, sent at the
beginning of June, forecasting that Italy would not have met its objectives in reducing the
debt both for 2019 and 2020. e Commission did not seem to show particular sympa-
thy for the methodological critique, pointing out many times how Italy agreed to those
targets in the rst place and that the methodological discrepancies had already been
discussed and “solved” in previous years (Dombrovskis and Moscovici 2018). Eventually,
the government had to approve a conditional budget freeze of two billion, facing the risk
of a sanction amounting to 0.7% of Italy’s GDP (around three billion euros).
Subsequently, the government also introduced corrections to the budget that reduced
the decit for 2019 to 2.0% instead of the foreseen 2.4% (the original MTOs set it at
1.8%). is change allowed that year’s structural balance to broadly be in line with the
targeted MTO. Aer these changes, the nance minister Giovanni Tria sent an addi-
tional letter to the European Commission ensuring Italy’s commitment to complying
with future targets (Tria and Conte 2019). is led to the Commission dropping the
case for an EDP and judging Italy as being broadly compliant with the SGP parameters.
is phase entailed a vastly dierent kind of contestation than the previous phase. In this
case, the role of the nance ministry and the depth of the technical critiques were rather
limited, but international visibility and the stakes at play were much higher. ose dif-
ferences can be explained in multiple ways: on the one hand, the lesser involvement of
the nance ministry can be justied by the somewhat isolated position that Giovanni
Tria held over this period. Tria was not directly aliated with any of the parties, and
his selection procedure had been shown to be particularly troubled.15 As interviewees
conrmed, Tria’s role in the government was to mediate between the other parties and
tame the desire of the Lega Nord, in particular, to oppose European targets and objec-
15 e previous nance minister had been vetoed by the head of state due to anti-euro attitudes.
Locatelli: Mind the Output Gap 21
tives. us, it seems reasonable that he had no interest in pushing for a further critique
of the Commission’s authoritative power.
Moreover, many interviews highlighted the relative independence that the nance min-
istry has in the Italian political setting. e nance minister does provide a political
direction to the work of the bureaucratic apparatus, but it is also true that when it comes
to very technical matters such as the ones we are describing, the autonomy of civil ser-
vants/technocrats is quite extensive.
On the other hand, the dierences between the two episodes give insights on the de-
velopment of knowledge controversies. In the rst phase, the main issue was acknowl-
edging the existence of a problem with the EC estimates and using expertise to oer
a critique of the scal objectives through the same language in which they were for-
mulated, one of technical matters. As the eld of scal policy has been object of this
interpenetration between scientic and policy objectives, the only way to legitimately
talk about scal matters becomes one of technical disputes. However, as soon as the
technical critique gained legitimacy and the experts’ consensus had broken down, the
overall shadow of objectivity and lack of arbitrariness had dissolved. us, a dierent
kind of critique could be put forward: a political one that only partially and instrumen-
tally could appeal to the technical aspects of the original dispute. In fact, we can see that
the political critique appears when there is overall agreement that the technical model
of the Commission presents aws and inconsistencies.
However, the original academic dispute, revived by the political dispute, is also rein-
vigorated and reopened by its involvement in policy: the indicator becomes the site for
a face-o between economists of dierent camps.
5 Conclusions
e move towards technocratic governance in EU scal surveillance has deeply trans-
formed the environment around scal policy decisions, reshaping the political dynam-
ics connected with scal policy. Reconstructing the output gap’s controversy here re-
veals previously unexplored aspects of the scal politics surrounding the euro and its
scal rules. Introducing the output gap as a central tool for scal monitoring did not
provide a “stable and consensual foundation over which political agreements can be
played out,” but rather “a shiing surface on which disputes can foment and acquire
signicance” (Barry 2012, 328). I argue that these dynamics are related to two main
aspects of this episode: one connected to the output gap itself, and another to the wider
politics of technocratic governance.
22 MPIfG Discussion Paper 24/7
First, estimating the output gap is a complex and challenging exercise that relies on
many assumptions and statistical tools, the accuracy of which is oen unclear. It is
a debated procedure and particularly unreliable when used for real-time estimations
(Heimberger and Kapeller 2017). Furthermore, it requires a set of somewhat arbitrary
choices and presuppositions over economic phenomena that raise questions and gener-
ate debate. As a result, its inherent features create an unstable foundation for a system of
governance that uses rules and technical devices to escape the ambiguities of political
choices. e discussion over the possible reforms of EU scal governance is currently
moving away from the centrality of the output gap. However, current proposals from
the Commission still aim to rely on other technical indicators such as DSA analysis, the
shortcomings of which are similar to those of the output gap (Wester 2023).
Secondly, this case study sheds light on the new policy scenario that resulted from post-
crisis scal governance reforms. Despite technocratic scal rules attempting to isolate
scal policy from political discussions, the reconstruction here shows that political con-
icts do not disappear but instead hide behind technical disputes. Technocratic scal
rules transform discussions over budgetary matters, changing the actor constellations
involved and the content of debates. ere is a shi in the type of conicts generated in
this environment: controversial issues appear to be more and more focused on the tech-
nical elements of the post-crisis architecture rather than its normative foundations, and
they progressively transform into transnational controversies involving expert com-
munities that transcends national government communities and gravitates within and
around European institutions.
Moreover, this process has progressively changed the lexicon used to discuss scal ob-
jectives, transforming the discussion of budgetary issues from confrontation over dif-
ferent understandings of the nality of scal intervention to apparent technical debates.
e politics of the economic method and the politics of numbers take center stage (Cli
2022). However, these discussions embody relevant debates over the nality of scal
policy, as well as dierent understandings of the inner workings.
In this new scenario, the expertise of actors involved becomes pivotal. On the one hand,
expertise allows actors to bring academic discussion, full of open-ended debates and
loose ends, into the policymaking realm, breaking down the facade of simplicity that
the political use of science puts forward. Without engaging in technical critique, it is
impossible to break down the veil of objectivity that surrounds technical decisions and
hides their contestability. Nevertheless, that is not a sucient condition to trigger po-
liticization, because the enacting of technical critiques requires actors interested in pur-
suing political ghts instrumentally using technical disputes. In this fashion, expertise
becomes an important tool in the hands of policymakers eager to contest elements of
the technocratic scal policy environment.
Locatelli: Mind the Output Gap 23
e ndings elucidate a mechanism that relates ideational contestation and more tra-
ditional interest-based political ghts. It appears that the move towards more techno-
cratic management of scal policy produces a feedback mechanism. e use of scien-
tic tools provides legitimacy for political decisions, depicting actions as objectives and
endorsed by the authority of science. However, as technical indicators take center stage,
their inner workings mean technical debates can enter the political and institutional
discussion. is duality within indicators reects the very natural eect of translating
scientic objects into the realm of politics. As science is intrinsically an unstable eld,
open to contradiction and falsication, its use in policy moves the same dynamics to
the political eld. e role of actor expertise and the structures of national expert com-
munities in this stage is central, as it allows for such a translation to happen.
ese ndings show the existence of new dynamics in the post-crisis reform frame-
work that not only directly connect with interest-based political ghts but also tie into
the world of ideational contestations and expert communities. More scholarly attention
should be given to the interplay of those dimensions in the multilevel decision-making
eld of European institutions. More attention should be paid to how the structures of
national expert communities may inuence the ability of actors to exploit this element
of the European scal framework in the process of bargaining for scal space. As the
current discussion on the future of scal rules still expects to prominently rely on bar-
gaining between member states and the EU Commission, understanding the way in
which national experts interact with a system of technocratic policymaking is a funda-
mental step in envisioning future dynamics connected to scal policy and their possible
shortcomings.
Finally, this study oers an alternative narrative of the political dynamics that have char-
acterized the Italian political landscape in the past few years. Going beyond the mere
interpretation of Italy's constant push for exibility in scal rules through the lens of
opposition between southern indebted countries and northern solvent ones, this paper
proposes a more nuanced reconstruction of the Italian situation under the post-crisis
scal framework. is might represent the rst step for more future research on the role
that expertise and technical knowledge play in the current political dynamics.
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List of Policy Documents
Letters between European Commission and member states
Country Members. 2016. “Letter of Country Members to European Commission.”
Dombrovskis, Valdis, and Serge Moscovici. 2018. “Letter from European Commission to Italian Fi-
nance Ministry.”
Dombrovskis, Valdis, and Serge Moscovici. 2019. “Letter from European Commission to Italian Fi-
nance Ministry.”
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Ministero dell’Economia e delle Finanze. 2016. Dra Budgetary Plan 2017.
Ministero dell’Economia e delle Finanze. 2017. Dra Budgetary Plan 2018.
Ministero dell’Economia e delle Finanze. 2018. Dra Budgetary Plan 2019.
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